Market Pulse Premium: Liquidity Bazooka
Market Pulse Premium: Liquidity Bazooka
Two important total US liquidity events driving the stock market that must not be ignored.
In this issue I write about how US and global liquidity is changing. I think this is the defining factor affecting US stock markets this year.
Before I start talking about US and global liquidity, I want to discuss a rather interesting tit-for-tat between Coinbase and the CME Group (the company operating the US’s largest financial derivatives and commodities exchange).
As you know, Coinbase runs the US’s largest crypto exchange and earns most of its revenues from trading fees.
The CME Group, on the other hand, runs an exchange that trades commodities (e.g. oil, orange juice, coffee beans) and derivatives (e.g. options).
Interestingly enough, on May 16th, both companies launched opening salvos into each other’s markets.
The Financial Times reported that the CME Group plans to launch spot markets for cryptocurrencies and Coinbase announced that it’s launching markets for oil and gold.
Caveat: technically CME Group already runs Bitcoin and Ether futures markets but these markets have been active for a long time and Coinbase earns a large chunk of its trading revenues from spot markets rather than futures.
At face value, it’s surprising that Coinbase would find itself facing staunch competition from a company that’s as foundational and deeply embedded into the traditional financial markets as the CME Group but on closer inspection, it does make sense.
Bitcoin and Ethereum are considered commodities by US financial regulators so why shouldn’t the CME Group run spot Bitcoin and Ether markets?
At a high level, I think Coinbase will be fine. It’s still the retail investor’s most trusted company for the trading and storage of crypto and the company has always faced staunched competition from other crypto exchanges.
The CME will be slow to grow its market share, partly because it’s a new entrant to a market with entrenched habits and partly because it doesn’t have as long of a track record as Coinbase of securely storing cryptocurrencies.
At the same time, Coinbase is working hard to diversify its revenues away from trading fees, which is crucially important for the company’s long-term growth.
📈 Liquidity Bazooka
Okay, back to the matter at hand.
We’re discussing how the US stock market is moving based on global money flows.
There are three important factors that will drive global money flows in the next few months:
First, the US housing market is getting a big boost from the US federal government.
Second, there’s a strong possibility that Japan’s rapidly devaluing of the Yen is being used as a tool to pressure the Chinese economy. There are interesting second effects based on how China counters.
Third, the Ukraine War continues to escalate and it presents the most pressing, yet undefined, risk for markets.
Let’s start.